HR Webinar: Employee vs. Contractor: Changes That Will Impact All Employers

Employee vs. Contractor:
Changes Impacting All Employers
Bob Greene, Senior HR Industry Analyst
7.15.21

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Today’s Speaker
Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 43 years in the
human capital management industry have been spent in practitioner, consultant and
vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New
Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits
system design as well as acquisition strategies. Bob also built a strategic HCM advisory
practice for Xcelicor (later acquired by Deloitte Consulting.)
As vendor/partner, he has had prominent roles in sales support, marketing and product
management at several companies and currently Ascentis. Bob has been a Contributing Editor
for IHRIM's Workforce Solutions Review journal, for the past eight years, and since 2020 has
served as Co-Managing Editor. His experience also includes two years as Adjunct Lecturer in
HRIS at Benedictine University in Lisle, Illinois. In addition to his 43 years of experience, Bob
also holds a BA in English from Rutgers University.
BOB GREENE

AGENDA
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1. Origins: The Fair Labor Standards Act (1938)
2. Federal Law Changes and Rule Interpretations Since 1938
3. State Action, Part I: California, The Dynamex Decision and the “ABC” Test
4. State Action, Part II: Other States and California post-Dynamex
5. The P.R.O. Act (H.R. 842) and Possible Upcoming Federal Action
6. How Ascentis Can Help

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Disclaimer
Before Taking Any Actions
Before taking any actions on the information contained in
this or any other Ascentis presentation, employers should
review this material with their professional advisors.
This presentation is based on the latest published information available up to 24 hours
prior to its broadcast. This information is changing and being reinterpreted frequently.
Please check for updates before relying on this content.
• Legal advice
• A political opinion
• The “last word” on these topics!
This presentation is NOT:

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Origins: The Fair Labor Standards Act of 1938

The Fair Labor Standards Act of 1938
• What the FLSA did:
• Established the federal minimum wage, at $0.25 per hour. It has been revised upward
many times since, most recently on July 24, 2009, to $7.25 per hour.
• Currently, 29 states and D.C. have minimum wage rates higher than the federal.
• Many of those states have indexed their minimum wage to rise with the cost of living (CPI).
• Where the federal and state minimum wages conflict, the HIGHER minimum wage rate applies.
• The minimum wage has done poorly in tracking against inflation:
• A full-time employee earning minimum wage in 2021 earns 18% less than they earned in July, 2009 (adjusted
for inflation.)
• In 1968, a minimum wage employee earned $10.59 per hour in inflation-adjusted terms), 46% more than the
current $7.25 per hour.
• Had the minimum wage been adjusted for inflation continuously since 1971, a minimum wage worker’s hourly
rate would be over $22 per hour today.
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Source: https://www.epi.org/publication/raising-the-federal-minimum-wage-to-15-by-2025-would-lift-the-pay-of-32-million-workers/

• What the FLSA did (for nonexempt employees):
• Mandated the payment of overtime, at a rate not less than time-and-a-half the regular wage,
for any hours worked over 40 in a consecutive, 7-day period. The law did not:
• Limit the number of hours an employee could be required to work over that 7-day period, provided
the employee is age 16 or older.
• Require payment for any hours at a rate higher than time-and-a-half (e.g., no double-time mandate).
• Require time-and-a-half for work on Saturdays, Sundays or holidays, provided that the hours worked
on those days are not in excess of 40 for the week.
• The FLSA reserves to the states the rights to pass laws that exceed the federal mandate (but not
reduce it.) Many states have laws more liberal than the FLSA when it comes to paying overtime.
• This may include overtime for working more than 8 hours in a day, or working 7 days consecutively.
• These states include California, Alaska, Nevada, Colorado and Kentucky.
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Source: https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/state-overtime-pay-rules-differ-from-federal-law.aspx
Extra Credit Question: (True or False): The overtime pay provisions of the FLSA were mostly intended
as an employee protection measure?

• What the FLSA did:
• Provided more detailed definition of “hours worked” to include all times during which an
employee is required to be on the employer’s premises, on duty, or at a prescribed
workplace. Further case law has extended this principle to various ancillary activities once
an employee is on premise, including changing into mandatory uniforms. (Collectively
bargained employees may bargain away some of these rights.)
• Recordkeeping:
• Required covered employers to display an official poster outlining the requirements of the FLSA.
HCM Best Practice: In today’s decentralized and often telecommuting workforce, these
posters can be incorporated into an employer’s Employee Portal or ESS Home Page.
• Required covered employers to preserve for at least three years payroll records, collective bargaining
agreements, sales and purchase records. Records on which wage computations are based should be
retained for two years, i.e., time cards and piece work tickets, wage rate tables, work and time
schedules, and records of additions to or deductions from wages.
• Limited child labor, on a graded basis, for those under age 18, and differentiated by
agricultural vs. non-agricultural jobs.
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Source: https://www.dol.gov/agencies/whd/flsa

• The original text of the FLSA defined “employer,” “employee,” and “employ,” but
not “independent contractor”:
• “Employer” was originally defined (quite circularly) as “any person acting directly or indirectly
in the interest of an employer in relation to an employee,” [29 U.S.C. 203(d)],
• “Employee” was defined as “any individual employed by an employer,” [29 U.S.C. 203(e)]
(subject to certain exceptions)
• “Employ” was defined as “includ[ing] to suffer or permit to work,” [29 U.S.C. 203(g)].
• Courts and the Department of Labor have long interpreted the “suffer or permit” standard to
require an evaluation of the extent of the worker's economic dependence on the potential
employer, and have developed a multifactor test to analyze whether a worker is an employee
or an independent contractor under the FLSA.
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Source: https://www.federalregister.gov/documents/2021/01/07/2020-29274/independent-contractor-status-under-the-fair-labor-standards-act

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Federal Law Changes and Interpretations Since 1938

FLSA Interpretation: 1947
• In November 1947, the Department of the Treasury proposed regulations
defining when an individual was an independent contractor or employee under
the SSA, which used a test that balanced the following factors:
• Degree of control of the individual *;
• Permanency of the relation[ship] *;
• Integration of the individual's work in the business to which he renders service **;
• Skill required by the individual *;
• Investment by the individual in facilities for work *; and
• Opportunity of the individual for profit or loss *.
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* From U.S. v. Silk, 331 US 704 (1947) ** From Rutherford Food Corp. v. McComb, 331 US 722 (1947)

FLSA Interpretation: 1979
• Then in 1979, the Ninth Circuit Court of Appeals, in Real v. Driscoll Strawberry
Assocs., Inc. 603 F.2d 748, 754 (9th Cir. 1979) reaffirmed the six-factor test,
with some minor adjustments:
• The degree of the alleged employer's right to control the manner in which the work is to be
performed;
• The alleged employee's opportunity for profit or loss depending on his managerial skill;
• The alleged employee's investment in equipment or materials required for his task, or his
employment of helpers;
• Whether the service rendered requires a special skill;
• The degree of permanency of the working relationship; and
• Whether the service rendered is an integral part of the alleged employer's business.
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IRS Contractor Determination Via Form SS-8
• Employers unsure of the employee vs. independent contractor status of a
position can use Form SS-8 to request an IRS determination.
17
Source: https://www.irs.gov/pub/irs-pdf/fss8.pdf (last updated May, 2014)

18

19

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Trump Administration Notice of Proposed Rule Making: 2020
• On September 25, 2020, the Labor Department published a NPRM in the Federal Register,
proposing to adopt an “economic reality” test to determine a worker's status as an employee or
an independent contractor. This would be a “simplification” of the current, 6-factor analysis.
• The test would have considered whether a worker is in business for him/herself (independent
contractor) or is instead economically dependent on an employer for work (employee).
• The Department further identified two “core factors”:
• The nature and degree of the worker's control over the work; and
• The worker's opportunity for profit or loss based on initiative, investment, or both.
• The proposal also identified three, less probative factors to be considered
• The amount of skill required for the work,
• The degree of permanence of the working relationship between the individual and the potential
employer, and
• Whether the work is part of an integrated unit of production
• The rule was proposed to be effective on March 8, 2021.
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Biden Administration Withdrawal of NPRM: 2021
• On February 5, 2021, the DOL published a proposal to delay the Independent Contractor Rule’s
effective date from March 8, 2021 until May 7, 2021. (86 FR 8326).
• On March 4, 2021, after considering approximately 1,500 comments received in response to
that proposal, the DOL published a final rule delaying the effective date of the Independent
Contractor Rule to May 7, 2021, as proposed. (86 FR 12535).
• On March 12, 2021, the DOL published a Notice of Proposed Rulemaking (NPRM) proposing to
withdraw the new Independent Contractor Rule in its entirety. (86 FR 14027).
• On May 5, 2021, after reviewing approximately 1,000 comments submitted in response to the
NPRM, the DOL announced a final rule withdrawing the Independent Contractor Rule. This
withdrawal took effect immediately upon the final rule’s publication in the Federal Register on
May 6, 2021, meaning that the Independent Contractor Rule never took effect. (86 FR 24303).
• As the DOL explained in the final rule, the Independent Contractor Rule was inconsistent with
the FLSA’s text and purpose, and would have had a confusing and disruptive effect on workers
and businesses alike due to its departure from longstanding judicial precedent.
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Source: https://www.dol.gov/agencies/whd/flsa/2021-independent-contractor

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State Action, Part I: California, Dynamex, and the “ABC” Test

California: The Dynamex Decision
• On April 30, 2018, the California Supreme Court decided a case entitled
Dynamex Operations West, Inc. v. Superior Court, No. 222732.
• Background:
• A group of plaintiffs, characterized by Dynamex as independent contractors, brought a lawsuit against
the company for violating California’s Industrial Welfare Commission Wage Order No. 9. This order,
applicable to the transportation industry only, obligates employers to abide by certain regulations around
wages, hours and working conditions.
• For the plaintiffs to succeed, they would have to be classified as employees. To make that case, plaintiffs
relied on a 2010 precedent, articulated in Martinez v. Combs. Defendants obviously urged the Court to
rely on a different precedent, which found key transportation workers to be contractors.
• The Supreme Court sided with the plaintiffs and found them to be employees, noting the language in
Martinez defining employment with the phrase “suffer or permit to work,” precisely as found in the FLSA.
• The Dynamex court, in its 82-page opinion, then went on to articulate a brand new test for employee
status within California, and it would have repercussions for ALL industries, not just transportation.
• The court looked at three possible tests: (a.) an economic reality test, (b.) a multi-factor test grounded in
common law, and (c.) a so-called “ABC” Test.
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Source: https://blog.judicata.com/understanding-dynamex-the-california-supreme-courts-response-to-silicon-valley-cdf281d75d2e

California: The Dynamex Decision
• The “ABC” Test. This test is far stricter than the more traditional “Control and
Direction” Test, and results in far more workers being classified as employees.
• The ABC Test:
a) The worker must be free from control or direction by the company, both under the terms of
the parties’ contract and as a matter of reality, AND
b) The service being performed must be outside the usual course of the business of the
employer, AND
c) The individual must be customarily engaged in an independently established trade,
occupation, profession, or business of the same nature as that involved in the service
performed.
• All three of the ABC Test’s criteria must be met for an individual to be legally
classified as an independent contractor.
(Alert: Look at criteria (b), above, again!)
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Source: https://blog.judicata.com/understanding-dynamex-the-california-supreme-courts-response-to-silicon-valley-cdf281d75d2e

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State Action, Part II: Other States and California post-Dynamex
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Where the 50 States Stand on Independent Contractor Laws
State Common Law ABC Test Include “A” Include “B” Include “C”
Alabama 
Alaska    
Arizona 
Arkansas    
California    
Colorado   
Connecticut    
Delaware    
D.C. 
Florida 
Georgia 
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Current as of December, 2020. Always check your favorite compliance update service for the latest updates!
Source: https://joinhomebase.com/blog/independent-contractor-laws/

Hawaii 
Idaho   
Illinois    
Indiana    
Iowa 
Kansas    
Kentucky 
Louisiana    
Maine    
Maryland    
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Massachusetts    
Michigan 
Minnesota 
Mississippi 
Missouri 
Montana   
Nebraska    
Nevada    
New Hampshire    
New Jersey    
New Mexico    
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New York 
North Carolina 
North Dakota 
Ohio    
Oklahoma 
OR




Oregon    
Pennsylvania   
Puerto Rico    
Rhode Island    
South Carolina 
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South Dakota 
Tennessee    
Texas 
Utah    
Vermont    
Virginia 
OR




Washington    
West Virginia    
Wisconsin   
Wyoming   
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The Consequences of Worker Misclassification
• The consequences of worker misclassification can be draconian.
• Example: California employer TechGiant, Inc., added 10 contract programmers for 10 weeks to
help at a crunch time to complete a software development project. They paid each contractor a
flat $1,500 per week, or $15,000 for the 10 week period. After an audit, full investigation, litigation,
and verdict or settlement, the following conclusions are reached and sanctions assessed:
• Workers are reclassified from contractor to employee (primarily, for failure to meet the “B” test),
• TechGiant is required to supply timekeeping records (which they don’t have, because they
incorrectly designated them as contractors). Lacking any employer time records, the workers
supply those records, reflecting an average of 75 hours of work
per week per employee.
• Back pay of $35,000 per worker is assessed.
• Unpaid employment taxes are assessed (FICA, FUTA, SUTA, etc.)
• Depending on circumstances, other “dominos” could fall:
• ACA Employer Shared Responsibility Penalties for missed required health insurance offers
• If the employee misclassification is determined by the IRS to be intentional on the part of
the employer, criminal penalties of up to one year in jail and/or up to $500,000 fine.
32

California Post-Dynamex Freakout: A.B.5 and Prop. 22
• The “b” test in California’s ABC Test, given its potential application to all
industries, not just transportation, caused something approaching panic by
employers in certain industries.
• Were the ABC Test to be fully applicable to “app-based driver” companies,
involuntarily reclassifying all independent contractors to employees at
organizations like Uber, Lyft, GrubHub, InstaCart, DoorDash, etc., the impact
could be profound (2020 approx. counts):
• Uber: 1 million
• Lyft: 1 million active (2 million over the course of the year)
• InstaCart: 500,000
• GrubHub: 65,000
• DoorDash: 1 million active (US, UK, AU);
1.9 million drivers added over 6 months in 2020
33

• As a reaction to the breadth (some said “overreach”) of the Dynamex decision,
California legislators wrote Assembly Bill 5.
• The purpose of the bill was to simultaneously broaden and narrow its application
in specific ways. For example, the law adds Labor Code §2750.3(b), barring the
Dynamex decision from applying to:
• Certain licensed insurance industry representatives
• Physicians, surgeons, podiatrists, dentists, psychologists or veterinarians licensed by the state
• Active California licensees in the following professions: lawyer, architect, engineer, accountant,
private investigator
• Securities broker-dealers or investment advisers who are registered with the SEC
• Direct salespersons as described in §650 of the Unemployment Insurance Code
• Commercial fishermen working on American vessels.
34

• A.B.5 was signed by California Governor Newsome on September 18, 2019 and
went into effect on January 1, 2020, and was retroactive to cover certain pending
worker classification cases.
• What A.B.5 did NOT do, was to exempt workers in the same industries over which
the Dynamex suit was brought in the first place: drivers, delivery, courier, and
most recently, app-based rideshares, grocery and restaurant delivery workers.
• And when rumors began circulating that impacted delivery service mega-
employers might pull out of California entirely, grass-roots movements began
(supplemented by more pro-passage spending on a single ballot measure than
any proposition in the history of California!
• This culminated in Proposition 22 passing on the California ballot on November 3,
2020 by a vote of 58.6% (yes) to 41.4% (no).
35
Source: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5
https://ballotpedia.org/California_Proposition_22,_App-Based_Drivers_as_Contractors_and_Labor_Policies_Initiative_(2020)

36
The PRO Act (H.R. 842) and Possible Upcoming Federal Action

Provisions of the P.R.O. Act (H.R. 842)
• On March 9, 2021, by a vote of 225-206, the House passed H.R. 842, the
“Protecting the Right to Organize” Act. The bill faces a very uphill struggle in the
Senate.
• The P.R.O. Act would:
• Expand the definition of “employer” to cover more situations, including imposing joint employer liability on a
business who has indirect or reserved control of another company’s employees.
• Expand the definition of “employee,” which would have a major impact on gig economy workers
currently classified as independent contractors.
• Effectively adopt California Supreme Court’s “ABC” test nationwide.
• Permit union security (mandatory membership) provisions in collective bargaining agreements, effectively
overriding states’ right to work laws.
• Reduce employers’ and workers’ rights to secret ballot elections.
• Prohibit the permanent replacement of workers who participate in economic strikes.
37
Source: https://www.jdsupra.com/legalnews/employers-beware-major-changes-to-the-4459444/

Provisions of the P.R.O. Act (H.R. 842)
• The P.R.O. Act would (continued):
• Prohibit employers from holding captive audience meetings during a union election campaign.
• Require arbitration of an initial collective bargaining agreement if the parties are unable to reach an
agreement within 120 days. The arbitration panel’s decision would be binding for two years unless the
parties agreed to amend it in writing.
• Compel mediation if collective bargaining over subsequent agreements has lasted 90 days without an
agreement.
• Prohibit class action waivers in arbitration agreements.
• Permit employees to use employer electronic communication devices and systems for all protected union
activities.
• Impose civil penalties on employers for unfair labor practices—up to $50,000 per violation and up to
$100,000 for unlawful discharge or “other serious economic harm to an employee” if the employer has
committed a similar violation within the preceding five years. Corporate directors and other officers of the
company could be individually liable for unfair labor practices.
• Create a private cause of action for unfair labor practices in federal district courts.
38
Source: https://www.jdsupra.com/legalnews/employers-beware-major-changes-to-the-4459444/

Passing the P.R.O. Act: A Tortured Path?
• Recognizing that the very pro-union PRO Act would face an almost certain filibuster in the 50-50
Senate, Democrats have proposed a number of alternative routes to passage.
• In April, Senate Democrats proposed embedding the PRO Act (either in whole or in part) into the
pending Infrastructure bill being debated in the Senate.
• Facing filibuster problems of its own, the Infrastructure bill has since been broken into two pieces:
a bipartisan portion, which Democrats hope to pass through regular order, and a separate bill with
provisions agreed to by Democrats only, which would be passed through “reconciliation process.”
• The “bipartisan” infrastructure bill passed the House on June 30, by a vote of 221-201, and bears a
price tag of $715 billion. It did not include any portions of the PRO Act.
• Even if all, or key provisions, of the PRO Act make it into any Infrastructure bill intended
to be passed by reconciliation, the Senate Parliamentarian may have the last word. All
provisions in reconciliation bills must be budget-impacting. Just as happened with the
$15.00 minimum wage proposal stricken from the American Rescue Plan Act, the
Parliamentarian may very well determine that PRO Act provisions cannot be included
in the Infrastructure bill.
39
Source: https://about.bgov.com/news/union-backed-pro-act-to-get-new-life-in-infrastructure-package/

Workforce Solutions for Demanding Work Environments
Our full suite of workforce solutions helps keep you compliant,
productive and profitable. We focus on automating the
complexity, so you can focus on the things that require a
human touch.
• Maintain detailed timecard and related records, for as long as
required under the FLSA, or indefinitely.
• Apply flexible and configurable rules for breaks, overtime, etc.,
including by state
• Seamless integration with Ascentis Payroll, or other payroll
systems of your choice
40

Questions?
41
Please enter any questions into the chat box, we
will get to as many questions live as we can!

bob.greene@ascentis.com
info@ascentis.com
www.ascentis.com
800.229.2713
Contact Us

HR Webinar: Employee vs. Contractor: Changes That Will Impact All Employers

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